Strategies for Impact Investing Using a Donor-Advised Fund

In Dan Pallotta’s controversial book “Uncharitable” he encourages us to rethink the non-profit model for philanthropy and posits that the traditional structure for charities limits the impact they can have.

Three pioneering impact investors got together recently to discuss how they are leveraging a 501c3 Donor-Advised Fund to make impact investments in for-profit/for-purpose businesses. These industry leaders are not trying to change the system as Pallotta suggests, but are rather combining the best of the business and non-profit worlds: Recycling philanthropic dollars for maximum and ongoing impact.

Mark Van Ness, the Founder of Real Leaders, sat down with two other leading social entrepreneurs and impact investors: Seth Goldman, co-Founder and teaEO Emeritus of Honest Tea, and Tim Freundlich, co-Founder and President of ImpactAssets to chat about how they got involved in the impact investing space and why they chose a donor advised fund to help change the world.

Why are you and others investing through the Donor-Advised Fund rather than just investing out of your own portfolio?

Seth Goldman: I do make investments out of my own portfolio, but I will take more of a risk with the donor-advised fund, because whether it succeeds or not, I’m not getting any money back personally. I know that if it is successful, that money will keep being passed on to others doing the same thing. To be able to support an entrepreneur’s vision and help achieve their mission is really fulfilling. That was the goal of putting my money in a charity – to support entrepreneurs and their vision. And we certainly didn’t say we’re only going to be supporting nonprofit entrepreneurs.

Mark Van Ness: I also like getting a tax deduction when I make the investment, versus if I do it from my portfolio and get no deduction. And I also personally like the fact that we don’t have to deal with tracking down a bunch of K-1’s at tax time.

Mark Van Ness has been active in impact investing since the 90s and serves on the Impact Assets Board of Directors. He is founder of SVN, the only major commercial real estate services company in the world with a gender-balanced leadership team and board. In 2010 he founded Real Leaders to inspire better leaders for a better world, via media, events and impact investments, including SOCAP, Impact Hubs, and Beyond Meat.

Tim Freundlich: Exactly. With folks who are active impact investors, K1’s are a big issue –something I began to realize a few years ago when I started getting more involved in direct investing myself and had to deal with the resulting K-1 issue. Some of the practicalities of a Donor-Advised Fund can make a big difference to an ImpactAssets client. It’s not just the fact that sharing a transaction across many shoulders can drive efficiencies, you also don’t have to sign all that paperwork. It’s really just an opportunity to insulate yourself from everything, from the K-1’s to subscription documents. It all gets centered in the Donor-Advised Fund at ImpactAssets. There are some practical reasons for doing it this way.

And then there’s the conceptual framing that Seth has just mentioned. As an investor, you will approach things a little differently – more creatively and aggressively – because you’re investing with your philanthropic dollars. You’ll think, “Wait a second. I’m trying to make the world better. I’m excited about these entrepreneurs. I’ve already got my tax break. Everything is aligned for me.” This doesn’t mean donors will check their brains at the door; they’re still assessing and making good investments. At Impact Assets, when we make options available to clients, we scrutinize them heavily around professional track records, managers and everything else that we can think of.

Tim Freundlich spent his early career at Calvert Social Investment Foundation. As President of ImpactAssets he has grown the Giving Fund to 10 times its size – to a $300 million impact investment, donor-advised fund. He is also the co-founder and President of Good Capital, which manages the Social Enterprise Expansion Fund LP, that has two operating structures: The annual SOCAP Conferences that attract more than 2,000 attendees and coworking and events space, Impact Hub Bay Area, NYC and DC.

Mark Van Ness: It’s helpful that I don’t feel the need to do due diligence to the same degree I would investing out of my own portfolio. With Beyond Meat, as an example, I knew that you had already vetted it and done the due diligence. Impact Assets has allowed me to do many deals that I would otherwise probably not do. For example, I’m now willing to do smaller deals because by investing through the DAF, I avoid the hassle of due diligence and chasing down all the K-1’s .

Join us next week as we explore the reasons for choosing a Donor-Advised Fund over a private foundation.

Seth Goldman is best known as the co- founder of Honest Tea which he sold to Coca-Cola in 2011. Before he did, he put $1.5 million worth of company shares into a donor-advised fund at ImpactAssets. By donating stock before the sale, he claimed an immediate tax deduction for its full market value, avoided realizing a taxable gain, and left him with more capital for impact investing. Today he is Chairman of Beyond Meat.

About The Author

Real Leaders is the world's first sustainable business & leadership magazine that is distributed to 25,000 CEOs in 130 countries, who control spending of $6 trillion. The company is a certified B Corporation, and signatory to the United Nations Sustainable Development Goals –
subscribing to the highest standards of transparency, accountability and performance.

FREE: Subscribe To Our Weekly Words of Wisdom!

Join the Real Leaders million strong global community – Nobel Laureates, celebrities, CEOs who control 10% of global GDP, social entrepreneurs, and up-and-coming leaders. Sign up for FREE and receive exclusive stories and digital editions. Plus FREE access to our archives when you click below.